Crypto market capitalization explained

Introduction

Calculating the market capitalization is a great way to gauge how valuable a crypto currency is in relation to other sectors of the economy, such as various stocks or commodities, and in doing so, can help you make smarter investment decisions.

Relying on the crypto market cap can also give you a fact-based look at how altcoins are performing — a much-needed source of objectivity away from social media. It may be tempting to think one coin is worth more than another just because its single unit is worth more, but a quick calculator of each coin's market capitalization will quickly reveal which is worth more in reality.

The total market cap gives insight on the total value of Bitcoin, Altcoins, Stablecoins, tokens, and all other crypto assets on the market combined. This metric is deemed important by many, as it can indicate the size and strength of the industry as a whole.

In this article while covering the importance of calculating the total market cap, we will also look at how to calculate the total market cap of the crypto industry as a whole. This will act as a gauge for the cumulative value of the blockchain and crypto industry. Knowing this, in combination with the market cap of a specific crypto will allow you to make more precise and timely investment decisions, increasing the chance of profits.

What Is Market Capitalization?

As previously mentioned, calculating the market capitalization of a given crypto currency will allow you to more precisely understand the strength of a crypto currency within the framework of the wider economy. Knowing the strength of a crypto currency will allow you to rank the popularity of the various crypto-coins across the market, in the same way you might value publicly traded companies across the market.

The higher the ranking of a given crypto-currency the more respect, popularity, and therefore visibility a coin will gain - boosting its value. These high ranking tokens have a good chance for longevity and real future value. Any coins in the crypto market top ten by market cap are essentially cemented as the crypto elite, though, as very young and constantly changing space, the elite can quickly be toppled.

Due to the relatively high volatility of the cryptocurrency markets, the market cap value can shift fairly frequently, sometimes fluctuating by hundreds of billions. For this reason it is imperative that before placing any order, that you check the market capitalisation to make sure that the coin is strong and that the market cap hasn't changed.

How is Market Capitalisation calculated?

So now we’ve discussed what market capitalisation is and why it might be useful, how do you calculate it?

The formula is fairly straightforward, multiply the circulating supply of a crypto asset by the price of an individual unit, so the formula would look like this:

Circulating supply of coins x price per coin = total crypto market capitalization

As an example, let's take the fictional ACoin and BCoin. ACoin has a total supply of 1,000 coins, and they are all in circulation. BCoin currently has a supply of 60,000 out of a maximum supply of 100,000 coins in circulation. The current market price of ACoin is $100, while BCoin is $2. So which coin has the bigger market cap?

ACoin market cap = 1,000 × $100 = $100,000

BCoin market cap = 60,000 × $2 = $120,000

So in this example we can see that even though one BCoin is 50 times cheaper than one ACoin, the value of the BCoin network is actually higher than the value of ACoin’s network. This is why market capitalization is a better estimation of a network's value than simply the price of an individual coin, which could be misleading if you thought a higher price per coin equated to a stronger coin. So remember to find out the supply of a coin before you invest, it could stop you investing in the wrong coin.

There are a number of other methods that can be used to calculate market capitalisation that you should utilize depending on market conditions.

The first of these methods would be deflationary tokens. A deflationary token is a crypto-currency where the total amount can be reduced in order to maintain a restricted supply thus retaining or increasing the value for the coin holders. To provide an example: let's say fictional crypto CCoin has a current maximum supply of 20 million tokens at a price of $1 per coin. However, CCoin’s team decides to buy back tokens from the market and ‘burn them’, effectively reducing the total maximum supply to 18 million CCoin.

Following the announcement of the coin burn, the BCoin price remains at $1. Knowing the coin burns will occur in the future, we can calculate the diluted market cap, which is important when deciding if a specific coin will be a sound investment.

So the regular calculation would be 20 million CCoin x $1 = $20 However, when the coin ‘burn’ is actioned the total market cap would $18 million CCoin x $1 = $18 million.

In this scenario, the diluted market cap is lower than the current one. In reality, this may not always be the case if the price per CCoin increased. It’s also important to be aware that a lot can happen in the time between the announcement of a ‘burn’ and the actual coin burn.

While being far from a precise metric, you should think of this calculation, the difference between the current and future price, as a snapshot that tries to estimate future value.

Circulating supply — which looks at the number of coins available to the public and is the method we will be looking into in depth in this article — isn't the only method for calculating a crypto market cap. Alternatives include calculating the total supply (factoring in assets that might be locked up or reserved) or ‘Maximum Supply’. In maximum supply, market capitalization is calculated by multiplying an altcoin’s (a term used to group all crypto-currencies, other than Bitcoin) price by the maximum number of coins that could ever feasibly exist. It’s important to be aware of these other methods if you are dealing with some new or less well known cryptos, the supply characteristics can change from crypto to crypto thus opening up possible further calculations that can help you make a decision on whether to invest in a crypto or not. Due to the different variable characteristics of cryptos-coin supplies, it is always prudent to look into the supply characteristics of a crypto you are interested to invest in.

Is market cap the best way to measure the popularity of a cryptocurrency?

It can be difficult to determine the correct supply information. Of course you can do a quick google search for ‘current supply of <crypto>’ but this information could be unreliable or out of date. If that data is incorrect, any further calculations will automatically be invalidated, as well as leading you to make a more risky investment than you might have liked.

Another factor to be aware of when applying a market capitalisation calculation to your crypto investment strategy is to consider the weight of reliability that you should put upon the calculation. There is much debate about how reliable the calculation actually is. Some critics claim that it has lost its importance as something of a legacy from stock trading, and can lead to misguided investment decisions and contribute to substantial levels of fear and greed.

Secondly, it’s possible to manipulate or miscalculate the market cap, so if you aren’t doing the calculation yourself be sure to check if you can find further information about what data was used and where it came from. In some cases, the calculator can offer a false sense of security or value of a given crypto, impairing your judgment.

What is the best strategy for applying market capitalisation to your crypto investments?

So how will knowing all this affect your strategy for approaching crypto-investment? First and foremost, knowing what the market capitalization of a given crypto is will give you greater knowledge of what coins are really the strongest and best to invest in. However, the most valuable coin may not always be the one with the most active network of people trading the currency, hence its liquidity might be lower.

Having said this, it is also generally true that smaller market cap cryptos have more growing room, and thus high potential rewards. Of course you have to balance this with questions such as: Will this crypto grow at all? Is there a chance that the value could diminish? And if the crypto valuation does go up when should I sell?

Smaller market cap cryptos experience higher volatility than their more established high market cap crypto counter-parts, so while the rewards can be bigger, the losses can also add up quickly as well, or simply stagnate completely. On the other hand the reverse is true for large market cap cryptos, lower volatility and higher values can make the market less attarctive for those on lower budgets.

This is where the long established concept of portfolio diversification comes in. You can diversify your portfolio by calculating the market cap for a range of cryptos, and once you have a nice balance of high market cap, well established long term investments, balanced with a selection of lower cap, short medium and long terms options, you will be able to establish a balanced and robust portfolio.

Conclusion

While coin market capitalisation calculations can be somewhat unreliable, and you wouldn’t want to stake your life savings on them, the knowing the ins, outs and nuances of why the calculator is useful and how it can be applied for maximum effect makes another important tool in your arsenal to elevate your crypto market trading and knowledge. Make sure you understand the type of supply the crypto utilizes, does the currency experience burns? How often? Are there any plans for the future? Are you sure that the supply of crypto you have identified is the actual supply, is there perhaps a higher max supply, or total supply and the figure you might have used could have been just the circulating supply?

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.